Question: How Is PFIC Income Taxed?

What is sub F income?

The income of a CFC that is currently taxable to its U.S.

shareholders under the Subpart F rules is referred to as “Subpart F income.” Under I.R.C.

In general, it consists of movable income.

For example, a major category of Subpart F income is Foreign Base Company Income (FBCI), as defined under I.R.C..

What is a PFIC for US tax purposes?

The passive foreign investment company (PFIC) regime aims to discourage US persons from forming a foreign corporation and using that company to invest in primarily passive investments, thereby attempting to shift income out of the US federal tax net.

What qualifies as a PFIC?

A passive foreign investment company (PFIC) is a corporation, located abroad, which exhibits either one of two conditions, based on either income or assets: At least 75% of the corporation’s gross income is “passive”—that is, derived investments or other sources not related to regular business operations.

How is excess Pfic calculated?

To do the math and compute total excess distributions:Figure out the total distributions received from the PFIC during the current year.Add up the total distributions received from the PFIC during the three prior years, divide by three, then multiply that by 1.25.More items…•

How do I avoid PFIC status?

If the startup meets either of the PFIC tests (the asset test or income test), one method of avoiding the PFIC rules is to ensure that all U.S. shareholders own their interest through a corporation holding a 10% or more interest in the startup.

Are ETFs considered PFICs?

Canadian mutual fund trusts (including ETFs) and mutual fund corporations are considered PFICs and, therefore, are subject to the PFIC rules.

What is the QEF election?

The QEF or Qualified Electing Fund election under §1295 is optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior §1291 gain has been dealt with.

Who should file Form 8621?

A U.S. person that owns stock of a foreign corporation and elects to treat such stock as the stock of a qualifying insurance corporation under the alternative facts and circumstances test within the meaning of section 1297(f)(2) must file a limited-information Form 8621.

What is passive income IRS?

Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS).

Do I need to file Form 8621?

Together with your tax return, you need to file Form 8621. This applies for each separate PFIC you are a shareholder if you: receive direct or indirect distributions from a PFIC. recognize a gain on a direct or indirect disposition of PFIC stock.

How do I find Pfic?

So how do I know if I have a PFIC? The two criteria given in the PFIC definition in Section 1297(a) are known as the “income test” and the “asset test”. The income test tells you to determine if 75 percent or more of the gross income of the corporation is passive. If it is, the corporation is a PFIC.

Is a foreign bank a PFIC?

The 1986 law exempted foreign banks and securities dealers that were licensed in the United States from being classified as PFICs. The new regulations deal with the status of foreign banks, financial institutions and securities dealers that are licensed to practice in their own countries but not in the United States.